C A L I FO R NI A I N S U RA N C E
L AW RE V I E W
JA N -A PR 2 0 1 2
550 S. Hope Street
Suite 2350
Los Angeles, California 90071-2618
(213) 996-4200
FAX (213) 892-8322
555 Montgomery Street
Suite 720
San Francisco, CA 94111-3910
(415) 352-6200
FAX (415) 352-6224
American States Ins. Co. v. National Fire Ins. Co. of Hartford
202 Cal.App.4th 692 ........................................................................................1
Two-year statute of limitations applied to insurer’s claim against another insurer because
the claim was for equitable contribution and was not founded on any writing. The claim
did not qualify as a claim for subrogation which is founded on a writing and therefore
subject to a four-year statute of limitations.
Reyes v. Macy’s, Inc., et al.
202 Cal.App.4th 1119 ......................................................................................3
*This is a non-insurance case and the issue relates to civil procedure.*
A party may not appeal an order granting its own motion to compel arbitration.
Rossa, et al. v. D.L. Falk Construction, Inc.
53 Cal.4th 387...................................................................................................3
*This is a non-insurance case and the issue relates to civil procedure, however, the costs
relating to obtaining an appeal bond (and who must pay them) often arises in insurance
cases.*
When a party wins on appeal, it may not recover the interest and fees it incurred to borrow
funds to secure an appeal bond.
M&F Fishing, Inc., et al. v. Sea-Pac Ins. Managers, Inc., et al.
202 Cal.App.4th 1509 ......................................................................................5
Plaintiffs were not entitled to restitution of premiums and commissions paid for insurance
policies issued by non-admitted surplus line insurers when their brokers lacked authority
to sell the surplus lines policies in violation of California’s Insurance Code and Unfair
Competition Law.
Carlson, et al. v. Century Surety Co.
F.Supp.2d --, 2012 WL 601707 (N.D. Cal.)....................................................6
Insurer is not required to reimburse plaintiff in underlying action for default judgment
when the associated settlement agreement was entered into by underlying plaintiff and
insured with collusion.
This is a federal district court ruling on the parties’ motions for summary judgment and
was modified after plaintiffs filed a motion for reconsideration as to the Court’s ruling on
its collusion finding. Please see our summary dated March 26, 2012.
Liberty Mutual Ins. Co., et al. v. Indian Harbor Ins. Co., et al.
-- F.Supp.2d --, 2012 WL 642890 (S.D. Cal.).................................................9
California generally requires horizontal exhaustion of insurance policies, but vertical
exhaustion will apply if the excess policy expressly states it is excess only to a specific
policy.
Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Insurance Services West, Inc., et al.
203 Cal.App.4th 1278 ....................................................................................10
An insurance broker who procures an OCIP policy for a developer’s construction project
has no duty to notify subcontractors who were also covered under the OCIP policy of the
insurance company’s subsequent insolvency.
SINNOTT, PUEBLA, CAMPAGNE & CURET APLC
i
Global Hawk Ins. Co. v. Century-National Ins. Co.
203 Cal.App.4th 1458 ....................................................................................11
Interstate trucking company’s insurer must reimburse sanitation company’s insurer for
uninsured motorist benefits it paid to its insured’s employee.
Imperial Tile & Stone v. State Farm General Ins. Co.
2012 WL 676233(not reported in Cal.App.4th, Cal.App.2d Dist.) ...........13
THIS CASE CANNOT BE CITED IN CALIFORNIA STATE COURT, AND IS
PRESENTED FOR REFERENCE AND INFORMATION ONLY.
General liability insurer has no duty to defend when the allegations in the underlying
complaint show no coverage as a matter of law and no extrinsic facts available to the
insurer indicate a potential for coverage.
DeWitt v. Monterey Ins. Co., et al.
204 Cal.App.4th 233 ......................................................................................14
An insurer may be held liable for failing to accept a reasonable settlement offer if: (1) the
insurer assumed the duty to defend and failed to accept a reasonable settlement offer; or
(2) the claim is, in fact, covered by the policy, and the insurer wrongfully refused to
defend.
Carlson, et al. v. Century Surety Co.
-- F.Supp.2d --, 2012 WL 1029662 (N.D. Cal.) ............................................16
Insurer is not required to reimburse plaintiff in underlying action for default judgment
when the associated settlement agreement was the product of fraud, and plaintiffs have no
standing to sue insurer when they gained their right to sue the insurer through a fraudulent
settlement agreement.
Thompson v. Navigators Ins. Co.
-- F.Supp.2d --, 2012 WL 1059931 (S.D. Cal.).............................................17
Individual was entitled to a defense as an additional insured as an officer, director, and
shareholder of insured corporation, and claim and issue preclusion related to insured
corporation’s counterclaims did not bar individual’s complaint against insurer.
ACF Western USA, Inc. v. Travelers Property Casualty Co. of America
-- F.Supp.2d --, 2012 WL 1067214 (E.D. Cal.) ............................................18
Insurance Code §790.03 and its attendant regulations do not provide a private cause of
action, and allegations based upon them may be struck from a plaintiffs’ pleadings.
Warkentin v. Federated Life Ins. Co.
-- F.Supp.2d --, 2012 WL 1110375 (E.D. Cal.) ............................................19
Insurer is entitled to rescind its insurance policy if insured made material
misrepresentations in his or her application for insurance and the policy provides the
insurer can contest coverage for that reason.
Tower Ins. Co. of N.Y. v. Capurro Enterprises Inc., et al.
-- F.Supp.2d --, 2012 WL 1109998 (N.D. Cal.) ..................................................20
Insurer is entitled to rescind its insurance policy if insured made material
misrepresentations in his or her application for insurance and the policy provides the
insurer can contest coverage for that reason.
SINNOTT, PUEBLA, CAMPAGNE & CURET APLC
ii
Axis Surplus Ins. Co. v. Glencoe Ins. Ltd.
204 Cal.App.4th 1215 ....................................................................................22
When an insured satisfies its SIR by paying part of a settlement, the rule that a nonparticipating
insurer’s coverage obligation must arise prior to the date of settlement does not apply.
Forest Meadows Owners Assn. v. State Farm General Ins. Co.
-- F.Supp.2d --, 2012 WL 1205204 (E.D. Cal.) ...........................................23
Under the definition of “wrongful acts” in directors and officers liability coverage, only
negligent misconduct is covered, and intentional misconduct is not covered.
Barseghian v. Allstate Ins. Co., et al.
2012 WL 1400497 (C.D. Cal.) ......................................................................24
Under a homeowner’s policy, an insurer will be equitably estopped from asserting the oneyear statute of limitations period as a defense if: (1) the insured had no actual knowledge
of the provision; and (2) the insured’s failure to discover the provision was reasonable.
Swi-Co Construction, Inc., et al. v. Amco Ins. Co., et al.
-- F.Supp.2d --, 2012 WL 1496185 (N.D. Cal.) ...........................................25
The duty to defend is triggered when the allegations in the complaint in the underlying
action indicate a potential for coverage and the policy exclusions do not exclude coverage
for all of the alleged damage.
Thompson v. Navigators Ins. Co.
-- F.Supp.2d --, 2012 WL 1520065 (S.D. Cal.) ............................................26
Rescission of an insurance policy is proper if the insured made material misrepresentations
in its application for insurance, and an insurer’s decision to rescind its policy does not
result in a waiver of its right to claim there was no coverage for a claim.
SINNOTT, PUEBLA, CAMPAGNE & CURET APLC
iii
Date
12/14/2011
(Ordered
Published
on
1/6/2012)
Case
American States Ins. Co. v. National Fire Ins. Co. of Hartford, 202 Cal.App.4th
692
Note: American States filed a Petition for Review to the California Supreme
Court on February 14, 2012. As of this date, briefing on the petition is not
completed, and the Court has not granted or denied the petition.
Two-year statute of limitations applied to insurer’s claim against another
insurer because the claim was for equitable contribution and was not
founded on any writing. The claim did not qualify as a claim for subrogation
which is founded on a writing and therefore subject to a four-year statute of
limitations.
American States and National Fire Insurance Company of Hartford (“National
Fire”) both issued general liability insurance policies to the same insureds for
consecutive policy periods. The insureds were sued in an underlying construction
defect action. American States paid over $1.2 million to settle the claim, and
National Fire paid nothing. The lawsuit was dismissed by April 2007.
The insureds assigned their rights against National Fire to American States for
damages they suffered as a result of National Fire’s failure to contribute to their
defense and indemnity payments in the underlying action. In May 2009,
American States filed its initial complaint against National Fire, alleging a cause
of action for equitable contribution. National Fire demurred on the ground that
the two-year statute of limitations barred American States’ claim. Before the
demurrer was heard, American States filed a first amended complaint alleging that
it was the assignee of the insured’s claims against American State. National Fire
demurred to that complaint as well, and the court sustained the demurrer, but
allowed American States to amend its complaint to add a subrogation cause of
action.
American States contended that a four-year statute of limitations applied to its
subrogation claim because the claim was based on the written assignment from the
insured to American States and the insurance policies issued by American States
and National Fire. The trial court sustained National Fire’s third demurrer,
finding American States could not make a valid subrogation claim. Instead,
American States was limited to asserting equitable claims, which were time
barred. The court sustained the demurrer without leave to amend and American
States appealed.
The Court of Appeal affirmed the trial court’s decision that the two-year statute of
limitation found in Code of Civil Procedure Section 339 (“Section 339”) applied
to the claim rather than the four-year statute of limitation found in Code of Civil
Procedure Section 337 (“Section 337”), because American States’ claim sounded
SINNOTT, PUEBLA, CAMPAGNE & CURET APLC
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in equitable contribution, not in contract.
Section 339 specifies a two-year statute of limitations for an action not founded on
an instrument in writing, whereas Section 337 specifies a four-year statute of
limitations for an action founded on an instrument in writing. The Court
examined two prior Court of Appeal cases discussing the issue (Liberty Mut. Ins.
Co. v. Colonial Ins. Co. (1970) 8 Cal.App.3d 427 and Century Indemnity Co. v.
Superior Court (1996) 50 Cal.App.4th 1115,) elected to disregard Liberty Mutual,
and clarified the law: a claim for equitable contribution is subject to a two-year
statute of limitations pursuant to Section 339. The timeliness of American States’
claim was therefore governed by Section 339, because it was an equitable
contribution claim and because American States could not satisfy the elements of
a subrogation claim. In insurance cases, subrogation is an insurer’s right to be put
in the position of the insured in order to recover from third parties legally
responsible to the insured for a loss that the insurer has both insured and paid.
The insurer stands in the shoes of the insured and has no greater rights than the
insured. Equitable contribution, on the other hand, is the right to recover from a
co-obligor who shares liability with the party seeking contribution. Unlike
subrogation, the right of equitable contribution belongs to each insurer and is not
based on any right of the insured.
The court discussed the eight elements of an insurer’s claim for equitable
subrogation, and determined that American States could not meet at least two of
them. First, American States could not allege that National Fire was primarily
liable for the settlement amount while American States had no liability. Both
insurers were responsible for the full extent of the insureds’ liability, not just the
damage that occurred during their own policy period(s). Thus, American States
was responsible for the full settlement amount even though National Fire may also
have been responsible for a share. Second, American States could not show that
its claim was one that its insureds could have asserted against National Fire for
their own benefit. The insureds recovered the full amount of their losses from
American States; thus, they no longer had a valid cause of action against National
Fire. National Fire’s liability to the insureds ceased when they recovered the full
settlement amount from American States. Thus, American States could not state a
claim for subrogation, and its claim for equitable contribution was time-barred.
Policy type: General Liability
SINNOTT, PUEBLA, CAMPAGNE & CURET APLC
-2
Date
1/19/2012
Case
Reyes v. Macy’s, Inc., et al., 202 Cal.App.4th 1119
*This is a non-insurance case and the issue relates to civil procedure.*
A party may not appeal an order granting its own motion to compel
arbitration.
Plaintiff Reyes sued Macy’s, her employer, as an individual and as a class
representative alleging Labor Code violations as well as Business & Professions
Code Section 17200 Unfair Business Practices claims and individual claims for
discrimination, harassment and retaliation. Macy’s brought a motion to compel
arbitration, dismiss the class allegations and stay the civil action until the
arbitration was completed. The trial court granted Macy’s motion to compel
arbitration of Reyes’ individual claims and denied Macy’s motion to dismiss the
class allegations. The trial court’s order provided that all of Reyes’ individual
claims were severed and subject to arbitration, while the representative claims
were stayed until the individual claims were arbitrated. Macy’s appealed the trial
court’s order and plaintiff moved to dismiss the appeal.
Although an order denying or dismissing a motion to compel arbitration is an
appealable order, an order granting a motion to compel arbitration is not an
appealable order. Code of Civil Procedure Section 904.1 provides the general list
of appealable orders and judgments. Macy’s argued that the trial court’s order
regarding the representative claims was functionally the same as a denial of a
motion to compel arbitration, and thus it was an appealable order. However, the
arbitration agreement relied on in Macy’s motion to compel arbitration concerned
only individual claims, not representative claims. Therefore, Macy’s did not ever
request that the court compel the arbitration of the representative claims, because
the representative claims were not within the scope of the arbitration agreement.
The trial court’s order could be construed as a denial of a motion to compel
arbitration, therefore the order is not appealable, and the motion to dismiss the
appeal was granted.
1/23/2012
Rossa, et al. v. D.L. Falk Construction, Inc., 53 Cal.4th 387
*This is a non-insurance case and the issue relates to civil procedure, however, the
costs relating to obtaining an appeal bond (and who must pay them) often arises in
insurance cases.*
When a party wins on appeal, it may not recover the interest and fees it
incurred to borrow funds to secure an appeal bond.
Code of Civil Procedure § 917.1(a)(1) provides that the filing of a notice of appeal
does not stay enforcement of a judgment unless an undertaking is given. An
undertaking may be a bond issued by a surety and filed in the trial court promising
SINNOTT, PUEBLA, CAMPAGNE & CURET APLC
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payment of the judgment if it is affirmed, plus interest and any costs that may be
awarded against the appellant. If the appellant prevails, it may recover as costs on
appeal the costs to procure a surety bond, “including the premium and the cost to
obtain a letter of credit as collateral….” (Cal. Rule of Court 8.8278(d)(1)(F).)
After a jury verdict in favor of plaintiff Rossa and defendant D.L. Falk’s
subsequent appeal, the parties partially settled the dispute, and a reduced judgment
of $635,000 remained. To stay enforcement of the judgment pending appeal, D.L.
Falk filed a bond in the amount of $955,000. To obtain the bond, the surety
required D.L. Falk to provide a letter of credit. D.L. Falk’s bank issued the letter
of credit, but only after D.L. Falk deposited $954,070 with the bank to secure
payment on the bank’s letter of credit. D.L. Falk obtained the $954,070 by
borrowing from its own line of credit with the bank and from the personal line of
credit of one of its principals. D.L. Falk paid $154,983 in interest on the two lines
of credit and earned $55,694 in interest on the amount deposited with the bank to
secure payment of the letter of credit. After the appellate court reversed the
judgment against D.L. Falk and remanded the case to the trial court, D.L. Falk
sought reimbursement for the premium and the cost to obtain the letter of credit,
including the net interest of $99,289 and a $1,784 fee required by the bank to
extend D.L. Falk’s line of credit. On remand, the trial court denied D.L. Falk’s
request, and D.L. Falk appealed.
The appellate court affirmed, and D.L. Falk filed a petition for review in the
California Supreme Court. The issue was whether the scope of recoverable costs
after securing a bond under Rule of Court 8.8278(d)(1)(F) included interest
incurred to borrow funds to secure a letter of credit. The California Supreme
Court said no.
In evaluating the scope of Rule of Court 8.8278(d)(1)(F), which allows a party to
recover, “if reasonable,” “[t]he cost to procure a surety bond, including the
premium and the cost to obtain a letter of credit as collateral…,” the court first
determined that Rules of Court are interpreted in the same manner as statutes, i.e.,
one must first attempt to determine the intent of the drafter. If the language of the
rule is clear and unambiguous, it governs. The court reviewed the intent behind
recent revisions to the rule and cases that dealt with the recovery of fees pursuant
to the rule. The court found an ambiguity in the rule as to the term “cost” and
looked to earlier decisions (Geldermann, Inc. v. Bruner (1992) 10 Cal.App.4th
640 and Christenson v. Cudahy Packing Co. (1927) 84 Cal.App. 237) to guide its
analysis. Ultimately, the court determined that construing the rule to extend to
D.L. Falk’s interest payments would be inconsistent with the earlier decisions
finding that cost provisions are to be strictly construed. Under this strict
construction, the court concluded that “the cost to obtain a letter of credit” does
not include interest on borrowed funds or fees charged to borrow funds that are
SINNOTT, PUEBLA, CAMPAGNE & CURET APLC
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Case
used to secure a letter of credit.
1/30/2012
M&F Fishing, Inc., et al. v. Sea-Pac Ins. Managers, Inc., et al.,
202 Cal.App.4th 1509
Plaintiffs were not entitled to restitution of premiums and commissions paid
for insurance policies issued by non-admitted surplus line insurers when
their brokers lacked authority to sell the surplus lines policies in violation of
California’s Insurance Code and Unfair Competition Law.
An insurer seeking to transact business in California must be “admitted” and
obtain a “certificate of authority” from the insurance commissioner. A nonadmitted insurer may offer particular types of insurance coverage not offered in
the admitted market. Most marine insurance coverage is placed by non-admitted
insurers. Placements by non-admitted carriers are made by a class of specially
licensed insurance brokers who are instead regulated by California’s surplus line
laws. To sell marine insurance by admitted carriers in California, a broker must
have a property/casualty insurance license. To sell marine insurance by nonadmitted carriers, a broker must also have a special lines’ surplus lines license.
Plaintiffs are commercial fishing companies alleging violations of the Insurance
Code and the Unfair Competition Law (“UCL,” Bus. & Prof. Code § 17200, et
seq.). Between 1996 and 2003, plaintiffs’ brokers placed at least 153 policies of
commercial marine insurance for them. Some policies were placed with admitted
insurers and some were placed with non-admitted carriers. Both the admitted and
non-admitted carriers paid claims during this time.
In 1998, two seamen were injured and made claims against “Protection and
Indemnity” policies issued to plaintiffs by FAI, an Australian non-admitted
carrier. FAI made payments on the claims for about three years, but stopped
making payments when it became insolvent. The claimants then sued the fishing
companies and the cases settled. The fishing companies then sued the broker
defendants for restitution of all premiums and commissions plaintiffs paid for the
153 policies of insurance issued by both admitted and non-admitted carriers. The
fishing companies alleged that the brokers’ actions constituted unfair competition
because the brokers’ sale of insurance from admitted and non-admitted carriers as
a package was part of a scheme to unfairly compete in California. The fishing
companies also alleged causes of action for negligence per se and declaratory
relief. The trial court awarded $3.5 million in restitution of premiums and
commissions paid by the fishing companies.
The brokers appealed claiming the trial court erred when it awarded restitution to
the plaintiffs for the premiums and commissions paid by plaintiffs for insurance
policies it purchased from admitted carriers in addition to non-admitted carriers.
The appellate court agreed. The UCL authorizes restitution of money that was
SINNOTT, PUEBLA, CAMPAGNE & CURET APLC
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acquired through unfair competition. The insurance from admitted carriers was
lawfully placed, and therefore, the fishing companies were not entitled to
restitution of the premiums and commissions they paid for these policies. The
appellate court also held that the fishing companies were not entitled to restitution
of the premiums paid for coverage from non-admitted carriers, because those
premiums were paid to the insurance companies and not to the insurance broker
defendants. In addition, the court noted that the record showed that only three of
the policies issued by the non-admitted carriers failed to fully cover submitted
claims.
The fishing companies also claimed that the brokers violated Insurance Code
Section 1764.1 by failing to deliver disclosure statements and provide required
notice that their policies had been placed with non-admitted carriers. The court
held that the fishing companies might be entitled to the return of brokers’
commissions earned by placing the non-admitted policies because of this
violation. The court also held that the fishing companies were not entitled to
prejudgment interest in this case, because the case was based on a violation of the
UCL, and the UCL authorizes injunctive relief and restitution, but not damages.
Recovery of interest on an award of damages is appropriate, but inappropriate on
an award for restitution.
Policy type: Commercial Marine Insurance/Protection and Indemnity
2/23/2012
Carlson, et al. v. Century Surety Co., -- F.Supp.2d --, 2012 WL 601707 (N.D.
Cal.)
Insurer is not required to reimburse plaintiff in underlying action for default
judgment when the associated settlement agreement was entered into by
underlying plaintiff and insured with collusion.
This is a federal district court ruling on the parties’ motions for summary
judgment and was modified after plaintiffs filed a motion for reconsideration
as to the Court’s ruling on its collusion finding. Please see our summary
dated March 26, 2012.
Plaintiffs Ron and Marion Carlson (the “Carlsons”) allege that Defendant Century
Surety Company (“Century”) had a duty to defend and indemnify its insured,
Gold Mountain Investments, Inc. dba Prudential California Realty (“Gold
Mountain”) and employees Betty Low and Julia Fox. The underlying action was
based on a failed real estate sale between the Carlsons (the sellers) and a buyer.
When the sale fell through, the prospective purchaser agreed to release a $1,000
deposit to the Carlsons, however, the Carlsons requested $5,000. Apparently, the
$1,000 was never deposited to the escrow account, and was not paid to the
Carlsons. The Carlsons then sued Gold Mountain/Prudential, seeking over
SINNOTT, PUEBLA, CAMPAGNE & CURET APLC
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Case
$65,000 in damages.
Gold Mountain was the named insured on a claims made and reported errors and
omissions policy issued by Century with a policy period of February 1, 2008 to
February 1, 2009. Gold Mountain tendered the Carlsons’ lawsuit to Century for
defense and indemnity, and also provided its real estate file for the Carlson sale.
Century denied coverage.
The underlying action eventually settled. Pursuant to the settlement agreement,
Gold Mountain agreed to allow a judgment to be entered against it, and in return,
the Carlsons agreed not to execute the judgment. Gold Mountain assigned all of
its claims and causes of action against Century to the Carlsons. A default
judgment was entered in the amount of $3,334,834.61 in favor of the Carlsons.
The Carlsons then sued Century directly to recover the judgment. In ruling on an
earlier motion for partial summary judgment filed by the Carlsons, the court ruled
that Century breached its duty to defend, but that there were factual questions
regarding whether the settlement agreement and default judgment of over $3.3
million was reasonable and free from fraud or collusion. The basis for this finding
was an August 20, 2007 letter in Gold Mountain’s real state file from the Carlsons
to Gold Mountain indicating the Carlsons were considering making a $65,000
claim against Gold Mountain.
A second set of summary judgment motions was filed on the following issues: (1)
whether Century’s breach of the duty to defend was in bad faith; (2) whether
Century can be liable for damages in excess of its policy coverage limits of
$500,000; (3) whether the settlement agreement and default judgment were
reasonable and free from fraud or collusion; and (4) whether Century had the duty
to indemnify Gold Mountain.
The Court of Appeal found that Century’s failure to defend was not unreasonable
because Century reasonably believed the August 20, 2007 letter placed the claim
outside the scope of its policy, and the Carlsons did not submit sufficient evidence
to the contrary to support their position. Regarding the issue of damages in excess
of Century’s policy limits, the court found that although the Carlsons were limited
to contractual damages because they failed to prove Century acted in bad faith,
contractual damages are not limited to the policy limits. The court reasoned that
all the detriment proximately caused by the breach of the insurance contract may
include excess settlements or judgments because a judgment in excess of the
policy limits is a foreseeable outcome of the breach of the duty to defend. A
judgment need not be limited to policy limits, because the judgment in the
underlying action bears no necessary relationship to the policy coverage of the
insured.
For the judgment to qualify as recoverable, however, it must be reasonable, and
SINNOTT, PUEBLA, CAMPAGNE & CURET APLC
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free from fraud or collusion. This rule is especially true where the insured agreed
to allow a default judgment to be entered against it in return from a covenant not
to execute. The court followed the holding in Pruyn v. Agricultural Ins. Co.
(1995) 36 Cal.App.4th 500, which set forth the established test for determining
whether the amount of a settlement is presumed reasonable. Under the Pruyn
analysis, the proponent must show: (1) the insurer wrongfully failed to provide
coverage or a defense; (2) the insured then entered into a settlement; and (3) the
settlement was reasonable because it reflected a good faith effort by the insured to
resolve the claim. The Carlsons established the first two elements and submitted
prima facie evidence of the third element. Thus, the burden shifted to Century to
prove the settlement agreement was unreasonable, fraudulent, or collusive.
The court found that Century met its burden of showing that the settlement
agreement was collusive. In the insurance context, collusion occurs when the
insured and the third party claimant work together to manufacture a cause of
action for bad faith against the insurer or to inflate the third party’s recovery to
artificially increase damages. Ms. Low’s and Ms. Fox’s declarations in support of
the settlement agreement contained material falsehoods because they stated they
did not know the Carlsons would make a claim against Gold Mountain. However,
Ms. Low’s deposition testimony and notes in evidence authored by Ms. Fox
indicated that they knew of the Carlsons’ claim prior to inception of the Century
policy.
The evidence also showed the Carlsons colluded with Gold Mountain, because the
settlement agreement was conditioned on receiving declarations from Ms. Low
and Ms. Fox stating they were unaware of the Carlsons’ claim prior to the
beginning of Century’s policy period. The declarations were only signed after
Gold Mountain met with the Carlsons’ attorney to discuss what type of
information needed to be included in them and the Carlsons maintained the right
to cancel the settlement agreement if the declarations were unsatisfactory.
Another factor showing the settlement agreement was entered in bad faith was that
the damages claimed in the complaint were approximately $70,000, but the
default judgment was in the amount of over $3.3 million. Century was not bound
by the settlement agreement and the default judgment because both were products
of collusion. The court requested briefing from the parties on the question of
damages Century owed for its breach of the duty to defend.
Policy type: Real Estate Errors and Omissions Liability
SINNOTT, PUEBLA, CAMPAGNE & CURET APLC
-8
Date
2/28/2012
Case
Liberty Mutual Ins. Co., et al. v. Indian Harbor Ins. Co., et al.,
-- F.Supp.2d --, 2012 WL 642890 (S.D. Cal.)
California generally requires horizontal exhaustion of insurance policies, but
vertical exhaustion will apply if the excess policy expressly states it is excess
only to a specific policy.
Indian Harbor Insurance Company (“Indian Harbor”) provided American Claims
Management, Inc. (“ACM”) with a claims made and reported primary
professional errors and omissions liability insurance policy for its administration
of insurance claims effective August 8, 2007 to October 1, 2008 (the “Primary
Policy”). Liberty Mutual provided excess follow form coverage to ACM that
encompassed the effective period of the Primary 2008-2009 Policy. (the “Excess
Policy”).
ACM was sued for negligence in handling a claim and tendered its defense to
Indian Harbor, Liberty Surplus, and Liberty Mutual. The underlying action from
which ACM’s current lawsuit arises settled for $7.5 million. Indian Harbor
declined to defend ACM in the negligence action, but contributed its $5 million
policy limits under the Primary Policy towards the settlement. Liberty Mutual
agreed to defend ACM in the negligence action under the Excess Policy subject to
a reservation of rights on the basis that the primary coverage had not been
exhausted.
This declaratory relief and equitable subrogation lawsuit followed, wherein
Liberty Mutual sued Indian Harbor and ACM. Liberty Mutual filed a motion for
summary judgment on the following issues: (1) whether Indian Harbor properly
exhausted the Primary Policy; and (2) whether Liberty Mutual’s excess policy
dropped down and provided a defense to ACM after that exhaustion. The court
found that the Primary Policy was exhausted because Indian Harbor contributed
$5 million to the settlement of the underlying action. (Excess carrier Liberty
Surplus was also a plaintiff in this action, but not involved in this motion and
decision.)
Whether Liberty Mutual’s excess policy dropped down depended on whether
vertical or horizontal exhaustion is appropriate in this case. Vertical exhaustion
means the policy limits under one particular primary policy must be exhausted
before the excess policy is triggered. Horizontal exhaustion means that the limits
under all applicable primary policies must be exhausted before the excess policy is
triggered. California generally requires horizontal exhaustion, but vertical
exhaustion will apply if the excess policy provides it is excess only to a specific
policy. Here, Liberty Mutual’s excess policy specified it was excess only to the
Primary 2008-2009 Policy and, therefore, vertical exhaustion was proper. Since
the court found that Indian Harbor exhausted the Primary 2008-2009 Policy when
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Case
it paid its limits in settlement of the underlying action, Liberty Mutual had a duty
to defend ACM in the negligence action.
Policy type: Excess Errors and Omission Insurance
2/28/2012
Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Insurance Services West,
Inc., et al., 203 Cal.App.4th 1278
An insurance broker who procures an OCIP policy for a developer’s
construction project has no duty to notify subcontractors who were also
covered under the OCIP policy of the insurance company’s subsequent
insolvency.
The Appellate Court noted that this is an issue of first impression in
California
General Contractor Bosa Development California, Inc. obtained an Owner
Controlled Insurance Program policy for a construction project it was working on.
Bosa’s brokers were Aon Risk Insurance Services West, Inc. and Aon Reed
Stenhouse, Inc. (collectively, “Aon”). Subcontractor Pacific Rim Mechanical
Contractors, Inc. (“PacRim”) sued Aon, alleging Aon had a duty to notify PacRim
that Legion Indemnity Company, the carrier issuing the OCIP policy, was found
to be insolvent by the Circuit Court of Cook County, Illinois. AON notified Bosa
of the insolvency, but neither Aon nor Bosa advised the subcontractors. Pac Rim
asserted that had it known of the insolvency, it would have ceased work until Bosa
obtained new insurance.
The Homeowners Association sued Bosa and its subcontractors, including
PacRim, alleging construction defects. Bosa filed a cross-complaint against
PacRim, seeking indemnity. PacRim cross-complained against Bosa and Aon for
declaratory relief, breach of contract, negligence, fraudulent concealment, and
negligent concealment. Against Bosa, PacRim alleged that Bosa breached the
subcontract between them by failing to provide and maintain insurance, and
failing to provide the required written notice of a modification or discontinuation
of the required coverage. Against Aon, PacRim alleged that Aon owed a duty of
reasonable care to procure and maintain the OCIP policy in PacRim’s favor and
that Aon negligently or intentionally failed to disclose Legion’s deteriorating
financial condition and eventual insolvency. The trial court sustained Aon’s
demurrer, finding it was unnecessary to impose on a duty on Aon to notify an
insured of an insurer’s post-issuance insolvency because: (1) Bosa was
contractually obliged to notify PacRim of Legion’s insolvency; and (2) California
case law provides that an insurance broker’s duty is to use reasonable care,
diligence, and judgment in procuring the insurance requested by the client, not to
notify an insured of an insurer’s post-issuance insolvency. The trial court
sustained the demurer without leave to amend and entered a judgment of
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dismissal.
The Court of Appeal affirmed the ruling, finding that Aon had no duty to inform
PacRim of Legion’s insolvency. Under established California law, insurance
brokers owe a limited duty to their clients, which is only to use reasonable care,
diligence, and judgment in procuring the insurance requested by the client. Public
policy supports the conclusion that insurance brokers do not have a duty to notify
insureds of an insurance company’s insolvency. To create such a duty is properly
the function of the Legislature, not the court, because it would: (1) fundamentally
alter the nature and corresponding duties of insurance brokers; and (2) increase the
costs of procuring insurance.
Although ten states and Puerto Rico have imposed a statutory duty on brokers to
notify an insured of a subsequent insolvency, California has chosen to enact such
legislation despite the fact that it has already imposed substantial duties on
insurers and brokers by means of the Insurance Code. Adoption of such a rule
should be done, if at all, prospectively by the Legislature to avoid uncertainty as to
the duties of insurance brokers. Finally, the court affirmed the trial court’s finding
that Bosa had a contractual duty to inform PacRim of Legion’s insolvency, and
thus, there was no need to create a new duty on the part of Aon to also inform
PacRim of Legion’s insolvency.
Policy type: General Liability Insurance
2/29/12
Global Hawk Ins. Co. v. Century-National Ins. Co.
203 Cal.App.4th 1458
Interstate trucking company’s insurer must reimburse sanitation company’s
insurer for uninsured motorist benefits it paid to its insured’s employee.
In this contribution action, Global Hawk sued Century-National seeking
reimbursement for benefits paid in an underlying lawsuit arising out of a freeway
collision. A truck driven by an employee of Global Hawk’s insured, E & Z
Express Trucking, an interstate trucking company, rear-ended a garbage truck
owned by Century-National’s insured Bluewater Environmental. Services, a
sanitation company. Bluewater’s employee, Sebastian Padilla, was injured.
Global Hawk refused to pay Mr. Padilla’s claim for damages, because the E&Z
truck that hit the sanitation truck was not listed in Global Hawk’s policy. Instead,
Bluewater’s own carrier, Century-National paid its $100,000 limits for uninsured
motorist benefits to Mr. Padilla. Mr. Padilla executed an uninsured motorist
subrogation agreement. Global Hawk subsequently cancelled E&Z’s policy and
sued E&Z seeking rescission of the insurance contract and declaratory relief, as
well as Bluewater and Century-National. Century-National cross-complained
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against Global Hawk for the $100,000 it paid to Mr. Padilla.
The trial court granted Century-National’s motion for summary adjudication as to
its right to reimbursement because Global Hawk had a duty pursuant to the
financial responsibility endorsement (“MCS-90 Endorsement”) included in its
policy to reimburse Century-National. Global Hawk’s policy carried the MCS-90
Endorsement as required by federal law, because E&Z was a motor carrier
engaged in interstate trucking. The MCS-90 Endorsement provides that the
insurer will pay, within limits, any final judgment recovered against the insured
for public liability resulting from negligence in the operation, maintenance, or use
of motor vehicles regardless of whether or not each motor vehicle is specifically
listed in the policy. The MCS-90 Endorsement obligated Global Hawk to provide
coverage for all of E&Z’s vehicles, including the truck not listed in the policy.
Judgment was entered against Global Hawk and E&Z.
Global Hawk appealed, contending that the MCS-90 Endorsement does not make
one insurance company liable to another insurance company that covered the loss
under its own policy and that the MCS-90 Endorsement only applies when the
injured plaintiff directly sues the insurance company, and the underlying loss
would not have been covered but for the MCS-90 Endorsement. An MCS-90
insurer’s duty to pay arises only when: (1) the underlying insurance policy to
which the MCS-90 Endorsement is attached would not provide coverage; and (2)
no other insurance can satisfy the judgment. Here, the Global Hawk policy did
not provide coverage for the unlisted truck, and there was no other insurance to
satisfy the judgment. Global Hawk contended that the Century-National policy
provided other insurance to satisfy the judgment, but the court held that other
insurance means other insurance held by tortfeasor motor carrier, not insurance
held by the person injured by the motor carrier.
Under federal law, the MCS-90 Endorsement obligated Global Hawk to
compensate Mr. Padilla even though the particular truck that hit him was not listed
in the policy. Under California’s Insurance Code, and Century-National’s
subrogation agreement with Mr. Padilla, Century-National was entitled to sue
E&Z and Global Hawk for the benefits it paid to Mr. Padilla.
Policy type: Interstate Motor Carrier Liability Insurance
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2/29/12
Case
Imperial Tile & Stone v. State Farm General Ins. Co., 2012 WL 676233(not
reported in Cal.App.4th, Cal.App.2d Dist.)
THIS CASE CANNOT BE CITED IN CALIFORNIA STATE COURT, AND
IS PRESENTED FOR REFERENCE AND INFORMATION ONLY.
General liability insurer has no duty to defend when the allegations in the
underlying complaint show no coverage as a matter of law and no extrinsic
facts available to the insurer indicate a potential for coverage.
This decision addresses a carrier’s duty to defend its insured in an underlying
employment discrimination lawsuit. The trial court granted summary judgment to
insurer State Farm General Insurance Company, ruling that the underlying
complaint did not fall within the terms of the policy. The Court of Appeals
affirmed.
State Farm issued a commercial general liability insurance policy to Imperial Tile
& Stone and its owners, Nir and Guy Bachar (collectively, “Imperial”). Carole
Benhamou filed the underlying action against Imperial, alleging that she was
harassed, treated differently, demoted, and ultimately terminated because of her
pregnancy. Imperial tendered defense of the underlying action to State Farm, and
State Farm declined to defend because: (1) the complaint did not allege “bodily
injury” caused by an “occurrence,” as required for coverage under the policy; and
(2) the allegations in the complaint were excluded from coverage because of the
“intentional acts” and “business practices” exclusions in the policy. Imperial then
filed this breach of contract and bad faith lawsuit against State Farm.
In ruling on State Farm’s motion for summary judgment , the trial court
determined there was a triable issue of material fact as to whether Imperial’s
conduct alleged in the underlying lawsuit was accidental or intentional because
Imperial claimed that it did not discriminate against Ms. Benhamou, she left her
position voluntarily, and she was paid all her commissions. Nevertheless, the trial
court granted State Farm’s motion because the allegations in the complaint were
excluded by the policy’s employment practices exclusion.
Applying well settled California law, the appellate court noted that the duty to
defend extends beyond claims that are actually covered to claims that are
potentially covered, but no further. Determination of the duty to defend is based
on a comparison of the allegations of the complaint and the terms of the policy,
and also when extrinsic facts known to the insurer suggest that the claim may be
covered. If, as a matter of law, neither the complaint nor the known extrinsic facts
indicate any basis for potential coverage, the duty to defend does not arise. Courts
interpret insurance policies based on ordinary rules of contract interpretation. Any
doubts, uncertainties, or ambiguities will be resolved in favor of the insured to
protect his reasonable expectation of coverage, but only where the policy
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provision in question is truly ambiguous and susceptible to more than one
reasonable interpretation.
Third party liability policies provide coverage for bodily injuries arising out of
accidental events. The question on summary judgment was whether there was a
triable issue of material fact showing Imperial’s acts, as alleged by Ms.
Benhamou, potentially constitute an accident under the terms of the policy. The
court determined that as a matter of law, Imperial’s acts were not accidents and
that Imperial’s alleged acts of discrimination did not constitute accidental conduct.
Also, the intentional application of an employment policy is not an accident, so
even if Imperial did not intend to harm Ms. Benhamou, the fact that it intended to
take certain actions against her meant there was no accident triggering State
Farm’s duty to defend. As a matter of law, the alleged acts were intentional and
showed no potential for coverage under the policy.
Since there was no potential for coverage within the four corners of the policy as a
matter of law, the court next examined the extrinsic facts known by State Farm.
The record showed that State Farm only knew that Imperial disputed the truth of
Ms. Benhamou’s claims, however these facts did not raise a possibility that the
alleged acts were accidental rather than intentional. Rather, it only raised a
possibility that Imperial did not act as alleged. Imperial’s denials were
insufficient to establish a potential for coverage. Since there was no potential for
coverage, the Court of Appeal did not address the applicability of the exclusions
in the policy. Finally, the court confirmed that without a potential for coverage,
there can be no breach of the covenant of good faith and fair dealing.
Policy type: Commercial General Liability Insurance
3/13/2012
DeWitt v. Monterey Ins. Co., et al, 204 Cal.App.4th 233
An insurer may be held liable for failing to accept a reasonable settlement
offer if: (1) the insurer assumed the duty to defend and failed to accept a
reasonable settlement offer; or (2) the claim is, in fact, covered by the policy,
and the insurer wrongfully refused to defend.
Monterey Insurance Company and California Capital Insurance Company
(collectively, “insurers”) declined to provide DeWitt with a defense in an
underlying personal injury action, and the trial court entered a default judgment
against DeWitt for just under $4.7 million. Thereafter, the underlying plaintiff
offered to settle for the $1 million policy limit, and the insurers rejected the
settlement demand. Instead, the insurers moved for an order setting aside the
default judgment and granting them leave to file a complaint-in-intervention. The
trial court denied the insurers’ motion, and the Court of Appeal affirmed this
decision. The insurers then paid $3.5 million in satisfaction of the default
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judgment.
DeWitt sued the insurers for breach of contract and bad faith claim. DeWitt
alleged that the insurers acted in bad faith when they failed to defend and
indemnify DeWitt in the underlying action despite their knowledge that DeWitt
was covered or potentially covered under the policy. The trial court denied
DeWitt’s request that it instruct the jury concerning an insurer’s duty to accept
reasonable settlement offers. The jury returned a special verdict finding the
insurers had not unreasonably failed to defend DeWitt in the underlying action,
and the trial court entered judgment in favor of the insurers on the jury verdict.
DeWitt filed a motion for new trial, claiming the trial court erred when it denied
his request to provide the jury instruction. The trial court denied the motion, and
DeWitt appealed.
The appellate court affirmed the trial court ruling, following established California
law recognizing a cause of action for bad faith based on an insurer’s refusal to
accept a reasonable settlement demand. An insurer may be held liable for failure
to accept a reasonable settlement offer if the insurer refused to defend the action
and coverage is later determined to exist. However, if an insurer correctly
determines that coverage does not exist, the insurer cannot be held liable for bad
faith refusal to settle. Thus, if there is no duty to indemnify, an insurer has no
duty to accept a settlement offer. If an insurer rejects a settlement offer on the
ground that its policy provides no coverage for the claim, and the claim is, in fact,
not covered, it will have no liability for the damages flowing from its refusal.
DeWitt argued that because the insurers breached their duty to defend and failed
to accept the underlying plaintiff’s settlement offers, the trial court should have
instructed the jury concerning an insurer’s duty to accept reasonable settlement
offers. An insurer may be held liable for failing to accept a reasonable settlement
offer if: (1) the insurer assumed the duty to defend and failed to accept a
reasonable settlement offer; or (2) the claim is, in fact, covered by the policy, and
the insurer wrongfully refused to defend. DeWitt failed to prove either of these
scenarios. Thus, he could not satisfy either of the requirements for proving the
insurers breached their duty to accept a reasonable settlement offer.
Policy type: Business Owner Liability Insurance
[Editor’s note: The Court of Appeals did not include any discussion of the basis
for the coverage dispute (why coverage was originally declined) in its opinion.]
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3/26/2012
Case
Carlson, et al. v. Century Surety Co., -- F.Supp.2d --, 2012 WL 1029662 (N.D.
Cal.)
Insurer is not required to reimburse plaintiff in underlying action for default
judgment when the associated settlement agreement was the product of
fraud, and plaintiffs have no standing to sue insurer when they gained their
right to sue the insurer through a fraudulent settlement agreement.
*Please see our case law summary for Carlson, et al. v. Century Surety Co., 2012
WL 601707 (N.D. Cal.) dated February 23, 2012 for the facts and procedural
history of this case.
In its February 23, 2012 order, the court found that Century met its burden of
showing that the settlement agreement was collusive and found that it was
“undisputed” that the Carlsons repeatedly demanded money from Gold Mountain
prior to the inception of Century’s claims made and reported policy. As such,
Century was not bound by the $3.3 million judgment. The court left open the
issue of damages, specifically, what damages Century was liable for, if any, for
breaching its duty to defend.
The Carlsons filed a motion for reconsideration of the court’s ruling that it was
undisputed that they demanded money from Gold Mountain prior to the Century
policy period, thereby evidencing knowledge that they knew about the claim
before the Century policy incepted. After reviewing the Carlsons’ newly attached
declarations and prior deposition testimony, the court found that it erred when it
found it was undisputed that the Carlsons demanded money prior to the policy
period. Thus, the court held its grant of summary judgment in favor of Century on
that basis was improper.
But the court also found there were independent grounds supporting summary
judgment for Century on the issue of whether the default judgment was
enforceable. For a judgment to be enforceable against an insurer, it must be: (1)
reasonable; (2) free from fraud; and (3) free from collusion. The court found the
settlement agreement was the product of fraud because Gold Mountain knew a
claim had been made against it, and its representatives signed declarations to the
contrary in exchange for a covenant not to execute on the default judgment. The
false declarations rendered the settlement agreement fraudulent. Therefore, the
settlement agreement was unenforceable against Century. The court found the
settlement agreement to be fraudulent as the false declarations were sufficient to
relieve Century of any coverage obligation, as the declarations helped
manufacture coverage where none would have otherwise existed. The court also
found the default judgment was unreasonable because the Carlsons were awarded
damages for claimed losses ultimately found to be unrelated t the failed sale of
their home.
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The court also ruled that the Carlsons were not entitled to recover damages.
Because the Carlsons gained the right to sue Century through an assignment of
rights in the settlement agreement, and because the court found that the settlement
agreement was the product of fraud, the Carlsons lost their standing to sue
Century. The entire settlement agreement, including the assignment of rights, was
no longer valid because the agreement was fraudulent. The court therefore
dismissed the entire case because the Carlsons no longer had standing.
Policy type: Real Estate Errors and Omissions Liability Insurance
3/28/2012
Thompson v. Navigators Ins. Co., -- F.Supp.2d --, 2012 WL 1059931 (S.D. Cal.)
Individual was entitled to a defense as an additional insured as an officer,
director, and shareholder of insured corporation, and claim and issue
preclusion related to insured corporation’s counterclaims did not bar
individual’s complaint against insurer.
This is an insurance coverage dispute between Navigators Insurance Company
(“Navigators”), Thompson Builders, Inc. (“TBI”), and Thomas Thompson
(“Thompson”). Navigators’ complaint against TBI sought rescission of its policy
based on alleged misrepresentations TBI made in its application for insurance.
Navigators also included causes of action for negligent and intentional
misrepresentation and sought a declaration that it had no duty to defend or
indemnify TBI in an underlying personal injury lawsuit.
Several months later, TBI and Thompson filed a procedurally defective
counterclaim against Navigators and tried to add Thompson as a counterclaimant.
At the same time, Thompson also filed a separate lawsuit against Navigators
based on the same set of events, seeking coverage as an officer, director, and
shareholder of TBI. Navigators separately moved to dismiss both the TBI
counterclaim and Thompson’s complaint. The court in the TBI case granted
Navigators motion to dismiss the TBI counterclaim due to non-opposition. The
court in the separate Thompson case required further briefing on Navigators’
motion to dismiss Thompson’s complaint and this decision is the result of that
further briefing. The court denied Navigator’s motion to dismiss the Thompson
lawsuit.
First, Navigators argued that Thompson could not bring an individual claim for
coverage. The court held the policy provided coverage for Thompson because,
under California law, an officer or employee of an insured corporation is entitled
to a defense if he or she was acting in an insured capacity when engaged in the
conduct that allegedly caused the injury. Navigators also argued there was no
coverage because the insurance policy had already been rescinded when
Navigators notified TBI that it was rescinding the policy on February 18, 2011.
But the court held that it had not yet decided whether the policy was validly
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rescinded. The court found it would be premature to decide there was no potential
for coverage for Thompson in the underlying action and that accepting
Navigators’ argument that the policy was already rescinded would create the
unacceptable result that once an insurance company has rescinded a policy, the
insured could not be able to challenge the rescission in court.
Navigators also argued that Thompson’s complaint was procedurally barred
because TBI failed to file a timely compulsory counterclaim in the original case.
Counterclaims are compulsory if they exist at the time of pleading and arise from
the same transaction or occurrence as the complaint. The Federal Rules of Civil
Procedure, however, do not prevent the filing of a subsequent complaint based on
claims that could have been raised as compulsory counterclaims. Instead, when
the second case is filed, the court must determine if the new claim is barred by res
judicata. Thus, Navigators had to rely on either claim or issue preclusion to
support the dismissal of Thompson’s complaint. Claim preclusion could not bar
the complaint because Thompson’s claims were made on his own behalf, and he
sought coverage distinct from the coverage sought by TBI. Thus, his claims are
not the same as TBI’s and cannot be precluded. Issue preclusion only bars
successive litigation of an issue of fact or law actually litigated and resolved in a
valid court determination essential to the prior judgment. Navigators cannot rely
on issue preclusion because TBI’s counterclaims were not actually litigated
because they were filed late and procedurally barred.
Policy type: Commercial General Liability Insurance
3/28/2012
ACF Western USA, Inc. v. Travelers Property Casualty Co. of America, -F.Supp.2d --, 2012 WL 1067214 (E.D. Cal.)
Insurance Code §790.03 and its attendant regulations do not provide a
private cause of action, and allegations based upon them may be struck from
a plaintiffs’ pleadings.
ACF Western USA, Inc. (“ACF”) alleged that Travelers Property Casualty
Company of America (“Travelers”) breached its insurance policy and the implied
covenant of good faith and fair dealing. ACF’s claims were based on Travelers
handling of ACF’s claim for coverage under a commercial property policy. ACF
alleged Travelers hired a consultant to investigate the damage at its property after
its roof collapsed. ACF alleged that the consultant’s true objective was to provide
a self-serving and biased conclusion regarding the cause of loss so that Travelers
could deny ACF’s claim. Travelers brought a motion to strike references to
California Insurance Code §790.03 and its attendant regulations from ACF’s
complaint. Pursuant to Federal Rule of Civil Procedure 12(f), a court may strike
from a pleading an insufficient defense or any redundant, immaterial, impertinent,
or scandalous matter. Immaterial matter is matter that has no essential or
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Case
important relationship to the claim for relief or the defenses being pleaded.
Impertinent matter is matter not necessary to the issues in question. Thus, the
purpose of a motion to strike is to avoid the expenditure of time and money on
immaterial and impertinent issues by dispensing with those issues prior to trial.
California law does not permit a private cause of action against an insurer for
violations of Insurance Code §790.03 or its attendant regulations (collectively
“Section 790.03”) which are related to fair claims practices. The court granted
Travelers’ motion to strike the references to Section 790.03 from the preliminary
allegations section of ACF’s complaint because ACF does not, and cannot, allege
a cause of action under Section 790.03. The court also granted Travelers’ motion
to strike certain subsections from Travelers’’ breach of contract claim because
they were either near verbatim recitations of Section 790.03, directly referenced
Section 790.03, or rephrased portions of Section 790.03.
However, the court did not strike other subsections from Travelers’’ breach of
contract claim because they were not restatements of Section 790.03. The court
held these other subsections were not immaterial or impertinent because they
related directly to ACF’s breach of contract claim.
Policy type: Commercial Property Insurance
3/28/2012
Warkentin v. Federated Life Ins. Co., -- F.Supp.2d --, 2012 WL 1110375 (E.D.
Cal.)
Insurer is entitled to rescind its insurance policy if insured made material
misrepresentations in his or her application for insurance and the policy
provides the insurer can contest coverage for that reason.
Warkentin sued Federated Life Insurance Company (“Federated”), claiming it
unlawfully denied him benefits pursuant to a disability insurance policy.
Federated brought a motion for summary judgment, claiming it was entitled to
rescind the policy because Warkentin failed to disclose chronic back pain and
treatment of that pain in his application. Warkentin filed his opposition to
Federated’s motion for summary judgment late and was not entitled to be heard in
opposition to the motion at oral argument. (The court did not that it reviewed and
considered the entire record in determining whether Federated’s motion was
supported, but also noted that it accepted Federated’s version of the facts for
purposes of the motion pursuant to Federal Rule of Civil Procedure section
56(e)(2).
In his application for disability insurance, Warkentin stated that he did not see any
chiropractors in the five years before completing the application. In fact, he was
seen by a chiropractor forty times in the five years before completing the
application for recurring back pain. Federated’s policy provides that it can contest
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Case
coverage based on material misrepresentations in the application for insurance:
Contesting Your Policy
We may not contest this policy after it has been in force for 2
years during your lifetime. This excludes any fraudulent
misrepresentation in your application. . .
Because Warkentin failed to disclose his chiropractic treatments and his condition
of recurring back pain, Federated was entitled to rescind the policy. The court,
therefore, granted Federated’s motion for summary judgment.
Policy type: Disability Income Insurance
4/2/2012
Tower Ins. Co. of N.Y. v. Capurro Enterprises Inc., et al. (N.D. Cal., April 2, 2012, No.
C 11–03806 SI) ___ F.Supp.2d ___ [2012 WL 1109998].
When alleged personal and advertising injury falls within the insuring agreement
and is not excluded from coverage, the insured is entitled to an evidentiary
presumption as to the existence and amount of liability in the amount of a
reasonable settlement entered into with the underlying plaintiff.
In this opinion, the court ruled on the parties’ cross motions for summary judgment. This
is an insurance coverage action, in which Tower Insurance Company of New York
(“Tower”) sought a declaration that it had no duty to defend or indemnify Capurro
Enterprises, Inc. (the named insured) and Nicholas Capurro (collectively, “Capurro”)
under a commercial general liability insurance policy that covered “personal and
advertising injury.” Capurro counterclaimed for breach of contract, breach of the
implied covenant of good faith and fair dealing, and declaratory relief based on Tower’s
failure to defend, indemnify, and settle an underlying trademark infringement suit.
The underlying action was based on these facts: Certa Pro and Capurro entered into a
franchise agreement; the agreement authorized Capurro to market and sell residential
painting services under Certa Pro’s “Proprietary Marks”; Capurro would pay Certa Pro a
minimum royalty per year, plus a percentage of his gross sales; Capurro wished to
terminate the agreement early; and Capurro then began marketing a new business, using
Certa Pro’s “Proprietary Marks” in advertising his new business. The underlying action
settled for $20,000.
The Tower policy provided coverage for personal and advertising injury under Coverage
B. The policy excluded coverage for the following potential advertising injuries: (1)
personal and advertising injury arising out of a breach of contract (“breach of contract
exclusion”); (2) personal and advertising injury arising out of the infringement of
copyright, patent, trademark, trade secret, or other intellectual property rights, but this
exclusion does not apply to infringement in your advertisement of copyright, trade dress,
or slogan; and (3) personal and advertising injury arising out of the unauthorized use of
another’s name or product in an e-mail address, domain name, metatag, or any other
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similar tactics to mislead another’s potential customers. Capurro tendered its defense
and indemnity to Tower, and Tower disclaimed coverage based on these exclusions.
Tower brought this action for declaratory relief and moved for summary judgment in
October 2011. Tower argued there was no duty to defend because in the underlying
complaint, Certa Pro did not allege the use of its advertising, copyrights, trade dress, and
slogans in Capurro’s advertisements. The court found that Certa Pro repeatedly alleged
the wrongful use of its “Proprietary Marks,” and extrinsic facts tendered to Tower by
Capurro supported Capurro’s claim for defense. Therefore, the court held that the
underlying action fell within the insuring clause. The court also ruled that whether
Tower engaged in bad faith was a question for the jury. The court left open the issue of
whether the breach of contract exclusion excluded coverage for Capurro.
Tower’s motion for summary judgment was based on its argument that Certa Pro’s
claims arise from a breach of contract, and therefore all of Certa Pro’s claims against
Capurro are excluded from coverage. The court reviewed the Ninth Circuit’s holding in
Zurich Ins. Co. v. Killer Music, Inc. (9th Cir. 1993) 998 F.2d 674 that the breach of
contract exclusion did not preclude coverage for advertising injury as well as case law
from other jurisdictions. The court then stated that, under California law, coverage
clauses are to be interpreted broadly, and exclusionary clauses are to be interpreted
narrowly. The court held that the breach of contract exclusion did not apply to preclude
coverage for Certa Pro’s claims against Capurro, because the alleged wrongs committed
by Capurro were legally cognizable claims whether or not a contract ever existed.
Therefore, the court found that Tower breached its duty to defend Capurro in the
underlying action.
In its cross-motion for summary judgment, Capurro attempted to characterize Certa Pro’s
claims as claims of disparagement, so that they triggered Tower’s duty to defend. The
court held, however, that to state a disparagement claim, the underlying plaintiff must
allege that the defendant made false, injurious, or derogatory statements about plaintiff’s
products, which caused it to suffer pecuniary damages. Here, there were no allegations
that Capurro damaged the reputation of Certa Pro. Therefore, Tower did not breach its
duty to defend Capurro with regard to claims of disparagement.
Capurro also argued that Tower’s failure to defend it meant that Tower was liable for the
amount of the entire settlement with Certa Pro. If an insurer wrongfully fails to provide
coverage or a defense, and the insured enters into a reasonable settlement of the claim,
the settlement amount is presumptive evidence of the insured’s liability on the
underlying claim and the amount of the liability. The court held that since Tower
breached its duty to defend, Capurro was entitled to defense damages and an evidentiary
presumption as to the existence and amount of liability in the amount of the settlement,
$20,000. The court also held that Capurro’s bad faith claim against Tower presented
questions for the jury and denied Capurro’s motion on this issue.
Policy type: Commercial General Liability Insurance
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4/11/2012
Case
Axis Surplus Ins. Co. v. Glencoe Ins. Ltd. (2012) 204 Cal.App.4th 1215.
When an insured satisfies its SIR by paying part of a settlement, the rule that a
nonparticipating insurer’s coverage obligation must arise prior to the date of
settlement does not apply.
In this contribution action following settlement of an underlying construction defect
lawsuit, the trial court concluded that a 60/40 split of the $750,000 settlement payment in
favor of Axis Surplus Insurance Company (“Axis”) was the most equitable result.
Glencoe Insurance Limited (“Glencoe”) appealed, claiming: (1) the trial court erred in
finding that Axis met its burden of proving there was a potential for coverage under the
Glencoe policy; and (2) the trial court abused its discretion by failing to apportion Axis’
$750,000 settlement payment using the equal shares method called for in both
companies’ policies.
Regarding the first issue, in an action for equitable contribution by a settling insurer
against a nonparticipating insurer, the settling insurer must show there was a potential for
coverage under the nonparticipating insurer’s policy, but it is not required to show actual
coverage. Here, the insured paid $250,000 in satisfaction of the Self-Insured Retention
(“SIR”) in the Glencoe policy as part of the settlement. The settlement is presumptive
evidence of the insured’s liability and the amount of the insured’s liability. In this case,
the settlement included the insured’s payment of the SIR. Therefore, the insured’s
payment of the SIR established its liability and the amount of that liability.
Whether a nonparticipating insurer had a legal obligation to provide defense or
indemnity prior to settlement of a claim is critical in an action for equitable contribution.
In an equitable contribution action, a court reviews the applicable facts and policies and
decides what is fair between the potential coinsurers. The rule is that a nonparticipating
insurer will be required to contribute to a settlement if its coverage obligation arose prior
to the date of settlement. (Safeco Ins. Co. of America v. Superior Ct. (2006) 140
Cal.App.4th 874 [emphasis added].)
However, the court determined that this case is an exception to Safeco’s general rule.
Glencoe’s coverage obligation did not arise until the insured satisfied the SIR as part of
the settlement. However, the Glencoe policy potentially provided coverage and a
Glencoe representative acknowledged potential coverage existed assuming the SIR was
satisfied. Also, Glencoe had notice of the claim and potential settlement. Thus, the
exception to the rule in Safeco is that when the insured has tendered a claim to the
nonparticipating insurer, the nonparticipating insurer’s duty to defend is subject to the
insured satisfying an SIR, and the insured satisfies the SIR as payment of a settlement of
which the nonparticipating insurer was aware, the nonparticipating insurer will be
required to contribute even though its coverage obligation did not arise until the insured
paid the SIR as part of the settlement.
Regarding the second issue, the trial court’s ultimate equitable determination in
allocating liability is subject to review under the abuse of discretion standard. Here, the
trial court carefully considered the relationship between the insured and the two insurers
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and the terms of the policies, including policy limits and time on the risk. The trial court
noted that it was balancing all the pertinent factors, including Glencoe’s greater time on
the risk and limits. Thus, the trial court’s allocation of liability did not amount to an
abuse of discretion.
4/11/2012
Policy type: General Liability Insurance
Forest Meadows Owners Assn. v. State Farm General Ins. Co. (E.D. Cal., April 11,
2012, No. 1:11–cv–01642–AWI–SKO) ___ F.Supp.2d ___ [2012 WL 1205204].
Under the definition of “wrongful acts” in directors and officers liability coverage,
only negligent misconduct is covered, and intentional misconduct is not covered.
Forest Meadows Owners Association (“Forest Meadows”) sued State Farm General
Insurance Company (“State Farm”) for breach of contract and breach of the implied
covenant of good faith and fair dealing. The underlying lawsuit was brought by a former
employee for discrimination and wrongful termination. Forest Meadows alleged State
Farm had a duty to defend because there was a potential for coverage under the directors
and officers liability coverage (“DO coverage”) provided in its condominium/association
policy. The court found there was no coverage because the term “wrongful acts,” as
defined in the DO coverage, refers only to negligence, and the underlying plaintiff
alleged intentional misconduct.
The State Farm policy defined “wrongful acts” as “any negligent acts, errors, omissions
or breach of duty….” The court followed Ninth Circuit and California District Court
decisions and held that the term “wrongful acts” means negligent acts, negligent errors,
negligent omissions, and negligent breaches of duty. Thus, only negligent misconduct is
covered, and intentional misconduct is not covered.
State Farm’s duty to defend would have arisen if the underlying plaintiff’s complaint and
any extrinsic facts known to State Farm suggested that Forest Meadows acted
negligently. However, the complaint only included allegations of intentional
misconduct. Thus, there was no duty to defend and State Farm cannot be held liable for
refusing to accept Forest Meadows’ tender. Also, without a duty to defend, there can be
no claim for breach of the implied covenant of good faith and fair dealing. The court
granted summary judgment in favor of State Farm.
Policy type: Directors And Officers Liability Coverage in a Condominium/Association
Policy
SINNOTT, PUEBLA, CAMPAGNE & CURET APLC
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Date
4/23/2012
Case
Barseghian v. Allstate Ins. Co., et al. (C.D. Cal., April 23, 2012, No. CV 11–6565 CAS
(VBKx)) 2012 WL 1400497.
Under a homeowner’s policy, an insurer will be equitably estopped from asserting
the one-year statute of limitations period as a defense if: (1) the insured had no
actual knowledge of the provision; and (2) the insured’s failure to discover the
provision was reasonable.
Allstate Insurance Company (“Allstate”) filed a motion for summary judgment claiming
that the action was barred by the one-year statute of limitations in the policy.
Barseghian’s home flooded and he reported his claim to Allstate on April 24, 2010.
Allstate paid benefits pursuant to the policy, and Barseghian’s attorney wrote to Allstate
requesting further policy benefits. Allstate sent a denial letter on June 3, 2010. Allstate
sent another denial letter on June 24, 2010 and cited the one-year statute of limitations in
the policy. Barseghian filed this action against Allstate on June 15, 2011.
A one-year statute of limitations is mandatory pursuant to California Insurance Code
§§2070 and 2071 for all claims for failure to pay policy benefits under a homeowner’s
policy. The one-year period begins to run at the time of the loss, and is equitably tolled
from the time the insured files its notice until the insurer formally denies the claim. The
statute of limitations was tolled on April 24, 2010, when Barseghian reported his claim to
Allstate. The question became “when did the tolling cease?”
The June 3, 2010 denial letter was an unequivocal denial, because it made clear that no
further benefits would be paid, but Allstate did not include language about the one-year
statute of limitations in this letter. Barseghian therefore had until June 3, 2011 to file
suit, unless Barseghian could demonstrate grounds for equitable tolling, in which case
the deadline might not apply.
Equitable estoppel arises when there is some conduct by the defendant that plaintiff
relied on that resulted in plaintiff’s belated filing of the action. The court found there
was a triable issue of fact whether Allstate was equitably estopped from asserting the
statute of limitations as a defense. Allstate notified Barseghian about the one-year statute
of limitations for the first time in its June 24, 2010 letter. Although it was required to
include this language pursuant to Department of Insurance Regulations §2695.4(a), it
was not required to include this language pursuant to DOI Regulation §2695.7(f),
because Barseghian was represented by counsel. However, the regulations differ in
scope and insurers must comply with both of them. Here, Allstate complied with
§2695.7(f), it did not comply with §2695.4(a).
An insurer’s failure to notify its insured of a statute of limitations provision establishes
an equitable estoppel if: (1) the insured had no actual knowledge of the provision; and (2)
the insured’s failure to discover the provision was reasonable. If Barseghian could
demonstrate these two elements, then the date when the tolling ceased would be June 24,
2010, because that is when Allstate first notified Barseghian about the statute of
limitations period. Barseghian’s lawsuit would then be timely because he filed it on June
15, 2011, which was within one year of when Allstate first notified Barseghian about the
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statute of limitations period. Whether Barseghian’s reliance was reasonable was a
question of fact, and the court therefore denied Allstate’s motion for summary judgment.
4/26/2012
Policy type: Homeowner’s Insurance
Swi-Co Construction, Inc., et al. v. Amco Ins. Co., et al. (N.D. Cal., April 26, 2012, No.
C 10–3122 PJH) ___ F.Supp.2d ___ [2012 WL 1496185].
The duty to defend is triggered when the allegations in the complaint in the
underlying action indicate a potential for coverage and the policy exclusions do not
exclude coverage for all of the alleged damage.
In this opinion, the court summarized its earlier opinion on defendant Nationwide Mutual
Insurance Company’s motion for summary judgment and ruled on plaintiffs’
(collectively, “Swi-Co’s”) motion for summary judgment. This insurance coverage
dispute arose out of a construction defect lawsuit. Swi-Co contracted with homeowners
to build their home. The homeowners hired an architect and civil engineers separately to
determine the appropriate place to build the house in relation to a nearby creek. During
construction of the house, water was discovered in the subfloor area. The water intrusion
caused problems with the subfloor, joists, insulation, and the duct work for the
mechanical ventilation and heating systems. Also, mold was discovered on the underside
of the subflooring. Swi-Co submitted a claim to Nationwide, who denied the claim
based on policy exclusions, including j5, j6, and the mold exclusion. The homeowners
sued Swi-Co, Swi-Co tendered its defense to Nationwide, and Nationwide disclaimed
Swi-Co’s tender of defense. Swi-Co settled with the homeowners and paid over $60,000
to defend the homeowners’ action.
Swi-Co brought this coverage action, alleging: (1) breach of contract for failure to defend
Swi-Co in the underlying action; and (2) breach of the implied covenant of good faith
and fair dealing. First, the court summarized its September 2011 opinion on
Nationwide’s motion for summary judgment. The first question was whether the policy
provided coverage for the claims asserted in the underlying action. The court compared
the language of the policy with the allegations of the homeowners’ complaint, and
decided the allegations were within the scope of the policy’s insuring agreement.
The second question was whether any policy exclusions applied to exclude coverage.
Exclusion j5 excluded coverage for property damage from the insured’s ongoing
operations. The parties agreed that there was water intrusion and mold growth while
Swi-Co and/or its subcontractors were performing ongoing operations on the property as
a whole. The issue, then, was what was excluded: damage to the whole property, or just
damage to the part of the property upon which Swi-Co was performing ongoing
operations. The court found that this created an ambiguity, which must be resolved
against Nationwide as the drafter. Therefore, exclusion j5 excluded coverage only for
damage to the part of the property upon which Swi-Co was performing ongoing
operations. Thus, there was coverage for damage to other parts of the project where no
operations were underway.
Exclusion j6 excludes coverage for damage to that particular part of property that must
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be restored, repaired, or replaced because “your work” was incorrectly performed on it.
The court found that the work performed by the architect and civil engineers was not
included in the definition of “your work.” Thus, exclusion j6 did not exclude coverage
for Swi-Co’s vicarious liability for the work performed by the architect and civil
engineers. However, the court also ruled that there was a factual question as to whether
Swi-Co, the architect, and the civil engineers incorrectly performed their work. The
court denied Nationwide’s motion for summary judgment on this issue.
Regarding the mold exclusion, the court ruled that despite the presence of mold and the
mold exclusion, Nationwide’s duty to defend was still triggered because the
homeowners’ complaint alleged damage other than damage from mold. The court
granted Nationwide’s motion for summary judgment on Swi-Co’s claims for breach of
the implied covenant of good faith and fair dealing and punitive damages.
The current decision addresses Swi-Co’s second motion for summary judgment that
Nationwide breached its duty to defend. The court reiterated its rulings regarding
coverage for Swi-Co’s claim, the mold exclusion, and exclusion j5. The court then ruled
on exclusion j6, finding that the exclusion did not apply and could not provide the basis
for Nationwide’s refusal to defend Swi-Co. The homeowners’ complaint alleged that
Swi-Co was responsible for the work performed incorrectly by others, including the
architect and civil engineers, who were hired by the homeowners and not by Swi-Co.
Thus, although repairs necessary because of Swi-Co’s work are excluded, the repairs
were covered because they needed to be made because of the work of others. Therefore,
the duty to defend was triggered by the allegations in the homeowners’ complaint,
because some of the alleged damage was caused by parties other than Swi-Co and its
subcontractors. The court also ruled that the amounts Swi-Co alleged as damages
adequately corresponded to the amounts Swi-Co had to pay to settle the underlying
action.
4/30/2012
Policy type: General Liability
Thompson v. Navigators Ins. Co. (S.D. Cal., April 30, 2012, No. 11–cv–381 JM – RBB)
___ F.Supp.2d ___ [2012 WL 1520065].
Rescission of an insurance policy is proper if the insured made material
misrepresentations in its application for insurance, and an insurer’s decision to
rescind its policy does not result in a waiver of its right to claim there was no
coverage for a claim.
This is an insurance coverage dispute between Navigators Insurance Company
(“Navigators”) and Thompson Builders, Inc. (“TBI”). Navigators sought rescission
based on alleged misrepresentations TBI made in its insurance application and a
declaration that it had no duty to defend or indemnify TBI in the underlying lawsuit. The
court’s prior ruling on Navigators’ motion to dismiss was included in our March 2012
Case Law Summaries. The parties then submitted motions for summary judgment.
The underlying action was filed after an employee of Vanderbuilt Construction
(“Vanderbuilt”) fell through a hole in the roof of a building where TBI was performing
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repair work. Navigators rescinded TBI’s insurance coverage because it claimed TBI
made material misrepresentations in its application for insurance.
Navigators’ two arguments on summary judgment were that rescission of the policy was
proper and there was no coverage for the underlying action. Rescission of an insurance
policy is proper if the insured made material misrepresentations in its application for
insurance. A misrepresentation is material if the insurer was misled into accepting the
risk or fixing the premium for the insurance. Navigators argued that rescission was
appropriate because TBI represented that it had not performed demolition work in the
past ten years and did not plan to do any demolition work in the future. The parties did
not agree on the definition of demolition work. Navigators asserted it meant demolition
of any part of a structure; whereas, TBI asserted it meant demolition of an entire
structure. The court decided that because the term is ambiguous, summary judgment in
favor of Navigators on this issue is inappropriate.
Navigators next contended that rescission was proper because TBI stated it would not be
performing roofing work and it did, in fact, perform roofing work. TBI argued that it did
not perform roofing work, but carpentry work instead, and a separate subcontractor
performed the roofing work. Again, because the term was ambiguous, the court denied
summary judgment in favor of Navigators.
In its application, TBI stated it performed 100% residential work, but the project where
the accident occurred was a commercial building. Thus, this was a misrepresentation,
and the court had to decide if it was material. Navigators argued it would have charged a
higher premium for coverage for commercial work, but there was conflicting evidence on
whether Navigators actually would have charged a higher premium had TBI disclosed its
commercial work. Thus, the court decided summary judgment in favor of Navigators on
this issue was inappropriate.
Navigators’ last argument in favor of rescission was that TBI misrepresented whether it
had or planned to perform any repair or remediation of fire damage. The parties
submitted conflicting evidence on this issue. Therefore, again, the court decided
summary judgment in favor of Navigators was inappropriate.
Navigators also argued there was no coverage for the accident and therefore, it had no
duty to defend TBI in the underlying action. Navigators argued there was no coverage
because TBI’s insurance application stated it performed only residential work and the
declarations page of the policy indicated that TBI’s business description was
“CARPENTRY—CONSTRUCTION OF RESIDENTIAL PROPERTY NOT
EXCEEDING THREE.” The court decided the definitions of the terms of the policy
were open to several interpretations, the policy was therefore ambiguous, and
construction of its terms would benefit from a review of extrinsic evidence. The court
decided that summary judgment on this issue was inappropriate.
Navigators also argued there was no coverage because of the employer’s liability
exclusion, which excludes coverage for bodily injury to an employee or temporary
worker arising from employment by the insured. Navigators argued the underlying
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plaintiff was a temporary worker employed by TBI, but was unable to establish this fact.
Therefore, summary judgment on this issue was also inappropriate.
The court then ruled on TBI’s motion for summary judgment. TBI argued that if an
insurance company rescinds its policy and refuses to defend the insured in the underlying
action, the insurer cannot later argue that policy exclusions negated coverage for the
underlying action. TBI argued that because an insurer waives the right to contest
coverage when it defends an action if it does not reserve its rights, Navigators similarly
waived its rights to contest coverage when it rescinded the policy. However, the court
held that Navigators’ rescission did not create a waiver and denied summary judgment on
this issue. The court also denied summary judgment on TBI’s argument that Navigators
had a duty to defend because the motion was premature.
Policy type: Commercial General Liability Insurance
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